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Diverse Bank Syndicates Help Insulate EMEA Corporates

Europe, Middle East and Africa (EMEA) corporates’ use of diverse cross-border bank syndicates would help insulate them from the risk of Spanish banks reducing their commitment to syndicated corporate lending if there is a further deterioration in Spain’s banking sector, according to Fitch Ratings.

A December 2011 Fitch analysis of 129 corporate borrowers across EMEA found that, for those with facilities of more than €400m, the median concentration with a single bank was just 14%, indicating that few if any large companies are heavily reliant on a single lender. There was also a lower correlation than might be expected between corporate domicile and banking group domicile as cross-border syndicates have become the norm for larger corporate borrowers.

Fitch’s stress test modelled a hypothetical downgrade of the viability ratings of major banks in Spain, Italy and France to bbb, which is still a notch below the current ratings of Banco Santander and Banco Bilbao Vizcaya Argentaria following their downgrade.

The review found that when first the Spanish and then additionally the Italian stresses were added the average composite rating of corporates’ lending groups barely changed. There was only a significant impact when French banks were added to combine all three, highlighting the bigger role French banks play in syndicated lending.

Fitch believes a failed draw on a bank remains unlikely for investment- grade issuers and that the level of diversification highlighted in our analysis makes the risk less pressing. A failed draw for a speculative grade issuer, although still unlikely, would not be unprecedented. Risks would be highest where banks were nominally committed to lend to an issuer whose compliance with covenants was in question, or where the issuers had been rapidly downgraded or subject to high-profile concerns about governance issues.